Small Community Banks Unhappy with New Mortgage Regulations

Small Community Banks Unhappy with New Mortgage Regulations

New banking regulations have been implemented for approving mortgage loans, but are they actually helping?

A flood of new paperwork created by the Dodd-Frank Wall Street Reform and Consumer Protection Act has many bank workers upset. The new regulations, which went into effect last July, has doubled the amount of paperwork needed in order to get a mortgage loan and, according to some bankers, the new regulations provide no extra benefits to the consumer.

Alesia Harlan is one such banker who has seen her load of paperwork double since the new regulations went into effect. She works at City State Bank in Norwalk, Iowa and she is unhappy that the new regulations created about two extra months of work for her last year just to review the 455 mortgage applications that came across her desk.

But that’s not the end of it. The bill is 2,300 pages long. It is expected to be twice that size once legislators put specific instructions and mandates in it in the next few years. Banks and financial institutions will have to implement these new regulations which will increase paperwork and likely “choke community banks,” which could cause many of them to close their doors permanently.

Jim Schipper, the banking superintendent for the State of Iowa, says that larger banks will not feel the crunch as bad as the smaller community banks will feel it. He says that the big banks can hire as many attorneys as they need to help them comply with the demands of the new regulations. He also said that many smaller banks may just stop making mortgage loans because it is too much trouble to comply with the new guidelines.

Smaller banks closing their doors would be nothing new, though. In the last 25 years or so, big banks have gone from controlling less than 30 percent of the banking industry in the United States to controlling nearly 80 percent of the industry in recent years. In 1984, about 40 percent of the smaller banks controlled the market compared to today’s figures of just over 10 percent.

Some of the new guidelines require banks to track the businesses they loan money to and to track overdrafts and “near-overdrafts” of their customers. Most of the small banks in this country do not have the technology to meet these guidelines and it would be too expensive for them to implement the new software and train employees on how to use it.

Not everybody is upset with the new regulations, though. Neil Stanley is a former bank president who is now in charge of the Omaha consulting firm Bank Performance Strategies. He says that the new regulations are not uncommon and every industry, including banking, goes through changes. This is one of those changes that banks must go through and if they can’t face the challenge, they simply won’t survive.

Do you know anything about the new bank regulations when it comes to mortgage loans? If so, how do you feel about the situation?

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